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Sunday, 12 June 2016

Market myth #1: Australia's crippling government debt

Market myths

Property market commentary has become infused with a tsunami of theories as to why the world is ending. 

Some represent credible threats, of course.

Others represent no such hazard, yet have been espoused so frequently they are increasingly being treated as common knowledge. 

When "everyone knows" something it's often a good time to consider whether "everyone" might just be wrong.

I'm going to look at a number of common myths in the next few weeks, and today it's...

Crippling government debt

Where did the idea come from that Australia has a high or unsustainable government debt?

I don't know, but whatever, it's neither of the above, and government net debt poses no serious threat to the housing market.

Yes, net debt has been rising, but our economy has been growing too, more or less continually for about 25 years now.

The International Monetary Fund (IMF) projects where general government net debt will be by 2018, charting the data by country as a percentage of each country's respective GDP. 

That's Australia down there in red. 

Not only do other countries have much, much, much higher net debt levels than us, they have had still higher government net debt levels still in the past, such as in the aftermath of World War II, for example.

Paradoxically when a country is at its most powerful economically, it may be able to take on even more debt without troubling itself (take Britain through the Industrial Revolution, for example).

That's not to say masses of government debt is a good thing. It isn't.

But we don't have high government debt in Australia - and even if we did the correlation with housing market strength doesn't appear to be very strong anyway.

Bond yields at record lows

Even if Australia did have a high level of government debt - which it doesn't - servicing the debt would be remarkably, incredibly cheap in historic terms. 

The worm in the chart below runs to June 2, 2016, which is just over a week ago.

It's a bit of a shame that the figures end on June 2, because only four days later Australia's 10 year government bond yield fell to a record-breaking low of just 2.16 per cent.

10-year Australian Government Bond Yield graph

Now, sure, rates can and will rise again at some point.

Could interest rates and bond yields could rise imminently, or even soar significantly? 

Of course, within reason virtually anything is possible.

I don't remember anyone forecasting 10 year bond yields of well under 2.2 per cent back in 2007, after all.

But on balance, a period of benign interest rates appears to be more likely. 

In any event, even if interest rates were to be hiked any time in the near future then the economy is likely to be significantly bigger than it is now (and thus interest payments as a percentage of GDP would correspondingly shrink).

Big numbers

Of course, you can always choose to argue the toss over whether the government's stimulatory spending through the financial crisis was perfectly targeted or carefully managed. 

Probably not, at least in certain cases, but that's not the point being tackled here.

One of the problems with commentary on national or government debt is that whatever number is quoted it sounds big. 

"A national government debt of $450 billion" or "government bonds on issue of $400 billion" will inevitably sound like a lot. But it really isn't relative to the size of the economy.

When it comes to debt and its relevance to Australia's housing market, private debt is the big show in town.

And I'll take a look at that in another post.